As real estate investment volumes slump globally, Vietnam appears to represent a relative bright spot for institutional investors among otherwise challenging property markets in emerging Southeast Asia.
“For institutional capital, Vietnam sits at the top of the pile,” Matt Nortcliff, a partner who focuses on real estate at global law firm Goodwin, told AsianInvestor.
“In terms of a manufacturing base, it has been a beneficiary of ‘China-plus-one’,” he said, referring to the risk-mitigating business strategy of avoiding investing only in China and diversifying business operations and supply chains into other markets.
“A number of groups have put manufacturing facilities there,” he said. “That has a knock-on impact on demand, particularly for logistics and industrial real estate, and also residential, as you see more multinational companies relocate more foreign workers.”
Wei Leng Tang, a Singapore-based managing director and head of capital markets at international commercial property services firm Colliers, also named Vietnam as the most promising real estate market in emerging Southeast Asia, singling out its young and growing population as a driver of institutional investor interest in the country’s real estate market.
She said some investors were eyeing redevelopment opportunities in particular.
“These could be in the residential space or in a more integrated development space, with retail, residential, and offices,” she told AsianInvestor.
Nortcliff said he had seen growing investor interest in Vietnam’s residential real estate market, but that the segment was not without its complications — particularly when it came to investors seeking to become long-term institutional landlords in the country.
“For Vietnam, residential has been on a lot of investors’ minds from a demographic perspective,” he said. “But limits on foreign ownership of land in Vietnam may deter some investors or negatively impact their return prospects, so your investment horizons for a build-to-rent opportunity are much shorter, meaning that returns have to be quicker.”
Tang said real estate investment in Southeast Asia and elsewhere was under broader pressure due to the upward march of interest rates worldwide, saying that global property investment volume had dropped 60% this year, a figure that both Nortcliff and M&G Real Estate head of investment strategy Jose Pellicer said was unsurprising.
“This fall in transaction volumes is happening across the board in Asia-Pacific, with one exception: Japan,” Pellicer told AsianInvestor.
“The reason is that the interest rate — even though it has risen from virtually zero to 0.6% — means that the income return on properties is still substantially higher than the borrowing cost.”
Pellicer also pointed to a variety of emerging market risks as a dampener of investor interest in Southeast Asia – risks that were largely absent in developed APAC markets.
M&G Real Estate
“If you go into a market like Vietnam, Malaysia, or Indonesia, you're taking a number of risks that you wouldn't be taking when investing in Singapore or Korea, and the most obvious ones are legal, political, and ownership risks,” he said.
“You’ve also got some tenant risks and competition risks,” he said.
“In Malaysia or Vietnam, for example, if you own a shopping centre, the risk of somebody building another one next door is substantially higher than it is in Singapore, Japan, or Korea, so you've got to be severely compensated for that.
"If you own an office building in Malaysia or in Bangkok — even if it's in the best location — the risk of having two or three new competing office buildings awarded planning permission and therefore competing with yours is also much higher. For instance, the office vacancy rate in Kuala Lumpur is 25%, while it's less than 5% in Seoul.”
Nortcliff said that investors’ aversion to such risks had grown, and that across emerging Southeast Asia, the risk-return ratio was less compelling than it had been in the past.
“There used to be the argument that growth in those markets would equate to emerging market-type returns, and that's cooled at the moment,” he said.
“The returns that institutional investors would be looking for would be in the high teens or 20% to justify the risks, and those returns aren't there at the moment. If you look around globally, there are other markets and other sectors within real estate where you can probably get pretty good returns much lower down the risk curve.”
Nortcliff said the upheaval in China’s real estate market crisis would have a degree of impact in emerging Southeast Asia, but that the risk of contagion was minimal.
Nortcliff said that despite the risks, some investors had learned their lessons and were committed and in a strong position to deploy capital in the region.
“Our clients who… have an appetite for emerging markets are as active as ever,” he said.
“They’ve had boots on the ground for a long time, and so when the opportunities arise, they’re the first ones in. There’s a split between old hands and investors who are kicking the tires, and the old hands have almost doubled down on some of the region’s key markets. But we’re operating in a ‘safety-first’ environment, and the most common response among those kicking the tires is, ‘Not for us right now’.”